Tuesday, January 15, 2013

Felix Salmon: "we fervently hope" for more lending


Felix Salmon at Reuters:

...the latest relaxation of Basel rules was emphatically done with monetary policy in mind, rather than regulatory prudence. Under the new rules, it might take banks longer to get to a truly safe place, but at least those banks will (we fervently hope) lend more in the meantime...

Let me give that to you again:

...at least those banks will (we fervently hope) lend more in the meantime, giving a much-needed boost to global growth.

Felix Salmon wants economic growth. He equates growth with bank lending. So he calls for more bank lending.

Here's the thing. It used to work like that. It did, and that's why people say things like Felix Salmon says. It's why they call for still more lending and still more use of credit and still more accumulation of debt today, when clearly that is a policy whose time has come -- and gone.

Remember "toxic assets"? Toxic assets are bad debts, or debts going bad if you catch them early. Why do debts go bad? Because people are bums? I don't buy that story.

Debts go bad because people can't afford to keep up the payments.

Why? Because sometimes, there gets to be too much credit in use. Too much debt.

Why too much debt? Because policymakers think the same way Felix Salmon thinks.

9 comments:

Benjamin said...

Well, more lending, if for capital expansion, is not bad thing, Although I would prefer corporations issuing stock.

Also, more lending is not a bad thing if it is relatively smaller than the growth of GDP.

In other words, debt increases by 20 percent but GDP by 30 percent.

BTW, what is the proposed Arthurian solution to out current economic woes?

Greg said...

Ask your self this question Ben;

Who are they fervently hoping for more lending to?

There are people out there whos debt to income ratio is low enough to take on more debt. Most of those people are quite rich and they are avoiding debt (rightly) because they can just pay cash and avoid interest costs. But if they took on more debt (or just spent more)we would get some activity.

Everyone else has no room for more debt and "fervently hoping" for their balance sheet to get to the point where they wish to take on more debt is unfortunately way too many peoples idea of an economic policy.

They just need to hope harder I guess.

Clonal said...

Ben,

The solution is the Federal Government that is not constrained financially - to come to the rescue - in other words, #MintTheCoin or print the money - whichever gives you the least heartburn (it shouldn't - but to many heartburn in this regard is a knee jerk reaction

Luke Smith said...

The money supply - M1 especially - has risen quite sharply the past 3 years. Yet, there has not been the hyperinflation some predicted. This extra money is sitting in bank accounts; people don't have the credit to take on debt like they did circa 1982/2000.

Paul Krugman interview with Bill Moyers I think is worth a look.

Joshua Wojnilower said...

JW Mason (I think) had a recent post discussing how when bank lending exceeds the growth of safe, govt assets, banks are becoming increasingly less liquid and more risky. The recent trillion dollar deficits have helped reduce the ratio of govt assets to bank debt, but I think there is a still a ways to go.

I should also point out that the excessive bank lending and corresponding interest payments have been a huge factor in the upwards redistribution of wealth. In hoping for increased bank lending now, Felix seems to be ignoring the long-run consequences of financial instability and wealth inequality.

The Arthurian said...

Benjamin, see Thursday's post --
An Alternative to Death by Credit -- for my plan to prevent the next great crisis.

Benjamin said...

The Arthurian_

Is that link workings?

Benjamin

Benjamin said...

Arthurian--

Is that link active?

Benjamin

The Arthurian said...

Oh, Sorry 'bout that, Benjamin! The link is working now.

Maybe I should say: there are two problems. The obvious problem is that we had the financial crisis. The solution to it might be described as a "solution to out current economic woes" as you put it.

The other problem is that we were doing things wrong, which led to the financial crisis. This is the problem I usually address. The solution might be described as a way to prevent such crises in the future.

Not exactly what you asked, I know.